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I don't think it's a question of "higher", I think it's a question of "yes that's the rate. No I don't think I'm interested in lending right now": IE a group who will lend at the LIBOR rate and a group who are not lending at ANY rate.

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I don't think it's a question of "higher", I think it's a question of "yes that's the rate. No I don't think I'm interested in lending right now": IE a group who will lend at the LIBOR rate and a group who are not lending at ANY rate.

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It appears that the prospect of receiving new liquidity demands has prompted banks to rush to raise funds – and, above all, hoard any liquidity they hold.

I guess if the banks are hoarding their money to protect their own liquidity and will try to raise money to increase their liquidity. When I try to raise money (without borrowing) I have to sell something. If they all try to sell something to raise money to increase their liquidity the price of the assets being sold will come down. If the assets being sold come down in price, won't they need to increase their liquidity with more asset selling if the collateral is falling in price?

I suppose they will want higher interest from people who borrow from them to overcome their reluctance to lend, and if asset prices are coming down they will want higher levels collateral to protect them from falling asset prices.

It does sound like higher interest rates while central banks ponder reducing rates

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I guess if the banks are hoarding their money to protect their own liquidity and will try to raise money to increase their liquidity. When I try to raise money (without borrowing) I have to sell something. If they all try to sell something to raise money to increase their liquidity the price of the assets being sold will come down. If the assets being sold come down in price, won't they need to increase their liquidity with more asset selling if the collateral is falling in price?

I suppose they will want higher interest from people who borrow from them to overcome their reluctance to lend, and if asset prices are coming down they will want higher levels collateral to protect them from falling asset prices.

It does sound like higher interest rates while central banks ponder reducing rates

I would be very interested to know if this happened before and if so what was the result (interbank rate higher than funds/base rate)?

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“What is happening right now suggests that the moves by the Fed and ECB just haven’t worked as we hoped,” admits one senior international policymaker.

...

“The system has just completely frozen up – everyone is hoarding,” says one bank treasurer. “The published Libor rates are a fiction.”

...

The crucial uncertainty is what, if anything, policymakers can do to combat the sense of panic. Some observers hope the problems in the sterling market, at least, may dissipate when the current maintenance period at the Bank of England comes to an end.

Others, such as Mr Weber, have suggested that banks themselves need to raise more funds in the capital markets to meet liquidity calls. However, many private sector bankers, for their part, say that radical steps from the central bankers are needed to remove the sense of panic.

This is all bad news. Seriously, are the central bankers basically telling the banks to sell, sell, sell? If not, what will be their (useless) cure of choice?

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Defaults due to imprudent lending cause banks to tighten credit causing further defaults that in turn result in an even greater reluctance to lend. There is a serious danger that this will become a self reinforcing cycle.This is not a time for laissez faire economic management by either Mervyn King and the BOE, or the government.

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Defaults due to imprudent lending cause banks to tighten credit causing further defaults that in turn result in an even greater reluctance to lend. There is a serious danger that this will become a self reinforcing cycle.This is not a time for laissez faire economic management by either Mervyn King and the BOE, or the government.

yes its self reinforcing. no the bank cannot bail them out. the bank can should and will 'Lean against' the cycle though

As bankers have returned to their desks this week after the summer break, they have been searching frantically for signs that the markets are gaining a semblance of calm after the August turmoil.

However, the money markets are notably failing to offer any reassurance. While the tone of equity markets has calmed, the sense of crisis in the interbank markets actually appears to be growing – especially in London.

In particular, the cost of borrowing funds in the three-month money markets – as illustrated by measures such as sterling Libor or Euribor – is continuing to rise, suggesting a frantic scramble for liquidity among financial groups.

This trend is deeply unnerving for policymakers and investors alike, not least because it is occurring even though the European Central Bank and the US Federal Reserve have taken repeated steps in recent weeks to calm down the money markets.

“What is happening right now suggests that the moves by the Fed and ECB just haven’t worked as we hoped,” admits one senior international policymaker.

Or as UniCredit analysts say: “The interbank lending business has broken down almost completely . . . it is a global phenonema and not restricted to just the euro and dollar markets.”

If this situation continues, it could potentially have very serious implications.

One of the most important functions of the money markets is to channel liquidity in the banking system to where it is most needed.

If these markets seize up for any lengthy period, there is a risk that individual institutions may discover they no longer have access to the funds they need.

This danger has already materialised for vehicles that depend on the asset-backed commercial paper sector – short-term notes backed by collateral such as mortgages.

In recent weeks, investors have increasingly refused to re-invest in this paper.

As Axel Weber, a member of the ECB council, admitted this weekend: “The institutions most affected currently are conduits and structured investment vehicles . . . Their ability to roll these short-term commercial papers is impaired by the events in the subprime segment of the US housing market.”

This problem is affecting the wider banking system because these vehicles are now tapping other sources of finance – mainly liquidity lines from banks.

It appears that the prospect of receiving new liquidity demands has prompted banks to rush to raise funds – and, above all, hoard any liquidity they hold.

The high demand from banks to secure liquidity for the next three months, coupled with their desire not to lend out what liquidity they have, has made it virtually impossible to execute trades – even at the official prices quoted for such borrowing.

That has created some extraordinary dislocations such as the fact that the cost of borrowing three-month money in the sterling Libor markets is now higher than borrowing six-month or 12-month money. “The system has just completely frozen up – everyone is hoarding,” says one bank treasurer. “The published Libor rates are a fiction.”

This situation could become increasingly dangerous in part because many other markets, such as swaps, are priced off the three-month Libor and Euribor rates. So the interbank freeze could have knock-on effects throughout the financial system.

A more pressing problem is the large volume of asset-backed commercial paper due to expire in coming weeks, which is set to increase the scramble for cash by the banks. “Money market stability needs to return as soon as possible,” says William Sels, of Dresdner Kleinwort. Jan Loeys, of JPMorgan, notes: “The longer it lasts, the greater the risk that the current liquidity crisis will worsen.”

The crucial uncertainty is what, if anything, policymakers can do to combat the sense of panic. Some observers hope the problems in the sterling market, at least, may dissipate when the current maintenance period at the Bank of England comes to an end.

Others, such as Mr Weber, have suggested that banks themselves need to raise more funds in the capital markets to meet liquidity calls. However, many private sector bankers, for their part, say that radical steps from the central bankers are needed to remove the sense of panic.

Whether the central bankers are willing or able to really help – in the UK or anywhere else – remains the great question.

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Gillian Tett has to be the most prolific financial journalist of all time, does she ever sleep? From what I've heard from various people working in treasury departments around the City the problem is a combination of not wanting to lend for longer than overnight so as not to be sitting on a 3 month loan with an institution that suddenly announces it's in trouble combined with being told to keep as much cash to hand as possible should it be needed for margin calls, funding commitments and so on. I also speculate that cash is being accumulated ready to allow quick deals to be done should there be the opportunity. Note that most of the big banks are net lenders in the interbank market so it's the smaller players that are suffering the most here.